Citi Research Says Eliminating Cash Will Help Central Banks

This is a “dated” note but thought those who did not see it would be interested.

According to Citi Research, the mere existence of hard currency (ie, cash banknotes) impedes the operational flexibility of central banks in making policy. Citi analysts Ebrahim Rahbar and Willem Buiter argue that a cash-based economy has an effective lower bound (ELB) on nominal interest rates which prevents central bankers from taking interest rates as negative as they need to be.

Buiter and Rahbar explain: “Central bank policy rates have been constrained by a perceived or actual effective lower bound (ELB) on nominal interest in recent years. The existence of the ELB is due to the existence of cash (bank notes) – a negotiable bearer instrument that pays a zero nominal interest rate. We view this constraint as undesirable and relatively easily avoidable from a technical, administrative and economic perspective.”

Eliminating cash gives central banks more flexibility

According to their analysis, getting rid of the ELB “restores symmetry to the setting of policy rates by central banks.”

From there, Buiters and Rahbar go on to argue that “symmetry is likely necessary if central banks are to be able to target inflation rates of around 2% with fiscal policy mostly dysfunctional in many AEs. Removing the ELB would therefore at least be prudent preparation for the next recession.”

They explain that the ability to reduce interest rates well below zero would have been a useful tool as an alternative to huge asset purchases (QE) by the Fed and other central banks worldwide. Moreover, relative to QE, significantly negative interest rates would lead to fewer of the financial stability risks and political legitimacy risks related to the quasi-fiscal actions of central banks.

Removing the ELB can be accomplished in three ways

The Citi analysts highlight three methods to remove the ELB on nominal interest rates. You could abolish currency altogether, or set up a system that pays interest (positive or negative) on currency or end the fixed exchange rate between central bank reserves and currency.

Buiter and Rahbar say the best option would simply be to retire all currency. They argue there “are countless alternative stores of value, means of payment and media of exchange, private and public. The role that currency – as one form of ‘money’ – can be absorbed by the other forms of base money which will remain in existence, notably central bank reserves.”

Problems with eliminating cash (abolishing currency)

In an interesting rhetorical twist, Buiters and Rahbar take the time to provide five powerful and compelling “disadvantages” that would result from eliminating cash (public will resist, poor people use currency, loss of seigniorage revenue, loss of personal privacy, security risks), but then cast them aside, disingenuously saying: “In summary, we therefore conclude that the arguments against abolishing currency seem rather weak.”

A reasonable person would conclude that any one of these major problems would make it obvious that abolishing currency is a very bad idea, but all five together make it absolutely clear that doing so would be an economic and political disaster and lead to great social upheaval. Frankly, anyone who doesn’t see this obvious truth has an agenda or is completely blindered by their own intellect.